Issues and Solutions

Making Bidding and
Winning Bid Logistics Easy

THE MARKET (Problems)

When a "Bid" is in play...


Phantom/shill bidding, bidders who can't afford their wins, auction houses and contract holders facing various difficulties in pre-qualifying or pre-screening anonymous as well as known participants.


Then, there are issues with rigging and steering contracts which are out for bids.


Bid Rigging as an Auctioneer, Seller or Official

  • Phantom Bids are false bids taken by an auctioneer to trick a legitimate bidder into bidding more than they would have bid otherwise. The auctioneer hires confederates to call out the phantom bids. If the phantom bid is the winner, either the lot is hidden and comes back around for a second auction, or the second-highest legitimate bidder is informed that the first bidder was unable to make payment.
  • Buy-Back is the strategy whereby the auctioneer or seller bids on a lot and buys it back to protect it from being sold to the highest bidder for an insufficient price. This is fraud if the auction is advertised as an "absolute auction", meaning there are no reserve bids.
  • In the real estate industry, phantom auctions may occur when the bank will 'tentatively' auction a foreclosed home, and give bidders an option to give "preliminary bids" for homes that are not yet authorized for auction. If the reserve bids are not met, the home will be updated as "never was available for auction" even though bids were received. Some houses will be auctioned at fire-sale prices and the auctions will be closed before the auction was formally announced. Investors rush to get in their preliminary bids before the house is technically up for auction. Bidders fear losing options so it results in more bids, and naturally, higher prices. If bidders fail to reach the target bids, then the item was never available for auction. Banks do this because if they unloaded all their toxic assets at once, the housing market would collapse, so foreclosed homes are dribbled out with phantom auctions.

These forms of bid rigging are not mutually exclusive of one another, and two or more of these practices could occur at the same time.


For example:


One member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning either by:


  • not bidding ("bid suppression")
  • submitting a high bid ("cover bidding").

Bid Rigging as Acts of Corruption


  • Change order abuse occurs when a contractor colludes with project officials, wins a low bid, then asks to change the contract afterwards. This is approved by officials, resulting in a much higher bid being retroactively approved.
  • Bidder Exclusion allows project officials to essentially choose their bid. There are multiple methods to achieve this end including:
  • Instituting unreasonable qualification parameters, excluding non-preferred firms, or effectuating the same by shortening the time of acceptance periods for new bids following a request.
  • Advertising projects to select bidders or bidding markets, thereby reducing publicity of bid procurement.
  • Bundling of contracts to exclude bidders.
  • Coercion and intimidation can also be used or simply rejection of individual bids over trivial matters.
  • Purchase splitting to reduce the minimum bid amount. This functions as contracts are split up to reduce the actual procurement amount and keep it under a threshold value. This reduces competitive bidding and enables less oversight at the project level as bid prices drop and kickbacks can be allotted.
  • Leaking of bid information, which requires a relationship of some degree between the project and a bidder as the bidder is handed information to gain an unfair advantage.
  • Bid Manipulation is another method for officials to choose the bidder of their choice but occurs after receipt of bids. The methods for this would include either changing bid parameters, evaluation processes, or other activity to effectively select the bidder of choice.
  • Rigged Specifications allow more bidder exclusion by officials by either tailoring requests to individual bidders or creating a vague criterion to reasonably choose a preferred bidder.
  • Unbalanced bidding involves high bid prices for commencing phases of development and low prices for later stages. This effectively increases the flow of funds for the bidding firm. This occurs when bidders cite high prices for items, intending to raise the number of units and purchase them at a competitive rate while simultaneously skimming profits from the artificially high bid price. Additionally, bidders may give low quotes for non-necessary items (knowledge gained through collusion or experience) to disadvantage other firms as their bid amount is more competitive. This also serves to increase the cost of entry for new firms.
  • Unjustified Sole Source Awards are bids chosen on criterion unrelated to their competitiveness. This can be performed either blatantly, by falsifying bids, or by price splitting.

Economic Costs

Many of the issues presented by bid rigging are the result of cartel

involvement. Inefficient firms are not pushed out as they would in a competitive market, and firms experience more profit despite an inefficient allocation of resources.


Cartels behave more like monopolies and as such their behaviors, such as bid rigging, create market inefficiencies as contracts are fulfilled at elevated values. Furthermore, bid prices increase with more repeated collusion. Ultimately this cost is typically borne by the taxpayer as government sponsored contracts are artificially above market value.


Additionally, this can be thought of as raising prices for the taxpayer (or consumer) as firms rent seek. One study found that bid rigging significantly raised prices over market value in the seafood industry in Philadelphia in a bidding scheme involving Defense Personnel Support Center, a purchaser for the Department of Defense.


The high price of entry and fewer entrants in many industries results in lessened incentives for firms to behave competitively.



RED FLAGS OF EXCLUDING QUALIFIED BIDDERS

  • See the list of common methods to exclude qualified bidders, above
  • One or a few contractors win a disproportionate number of contracts of the same type
  • Apparently qualified companies consistently fail to bid, or lose unfairly in the selection process
  • Fewer than 30% of the companies that purchase bid packages submit bids
  • Fewer than the expected or normal number of bidders, based on prior similar contracts, submit bids
  • Complaints from prospective bidders regarding the above practices

WORK TO DETECT AND PROVE EXCLUDING QUALIFIED BIDDERS?

1.) Identify and interview all complainants and confidential sources to obtain further detail:


  • General interview questions
  • Excluding qualified bidders’ questions


2.) Obtain the following documents and examine them for the red flags listed (left):

  • Procurement Guidelines and thresholds
  • Requests for expressions of interest
  • Approved bidders list (short list) and prequalification criteria
  • Published notices and advertisements for bids
  • Requests for bids or proposals
  • Bid evaluation reports
  • Complaints from bidders


3.) Determine if a reasonable number of bids or proposals were received compared to the expected or previous number of bids for similar procurements.


4.) Determine if bidders were disqualified for what appear to be arbitrary or trivial reasons.

4

THE MARKET (Solutions)

BidCoins Can

  1. Leverage blockchain oracles for authenticating items and sellers
  2. Qualify bidders by various data points such as: credit score, average bank balance, age and more WHILE maintaining anonymity
  3. Ensure that NO bid is submitted by Auctioneer or item owner WHILE maintaining anonymity
  4. Inform bidders through qualification data about auctions, sellers (item owners) and auction house/contract holder details


Remediate | Encapsulate


Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both.


At a very basic level there would likely be more competitive bidding if there were more firms present in a market, outside of a cartel, as evidence shows that bids lessen in value as the number of firms rises. Furthermore, collusion becomes less frequent with better market competitiveness, a result of reduced ability to compromise.


The OECD's suggestions for better tenders include:


  • Developing expertise and awareness of the market for which a tender is being designed.
  • Maximize the number of bids and potential contractors for enhanced competition among proposals.
  • Strive for clarity in requirements and details.
  • Reduce potential for communication between bidders and procurement officials and adhere to a strict criterion and process of evaluation.[13]


Suggestions for ameliorating procurement auctions have also been put forth.


Lengstein and Wolfstetter suggest that when a particular bidder is preferred, disregarding cost, possible reforms include a sealed Vickrey auction or if there is reason to believe that officials and bidders are in contact, an open auction is preferred to sidestep potential bribery.


When officials are engaged in more competitive procurement processes with regard to price but are suspected of kickbacks, a potential solution would be the open auction preventing clandestine arrangements such as change order abuse. If a closed or sealed auction process is preferred, then the use of electronic bidding and investment in tamper-resistant systems is suggested.

Who Use SHOULD Our DApp?

"And all their customers too!"

3rd Party Logo/Brand Disclaimer

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Reference Sources

  1. Change Order Abuse". guide.iacrc.org. Retrieved 2018-09-11.
  2. Excluding Qualified Bidders". guide.iacrc.org. Retrieved 2018-09-11.
  3. Split Purchases". guide.iacrc.org. Retrieved 2018-09-11.
  4. Leaking of Bid Information". guide.iacrc.org. Retrieved 2018-09-11.
  5. Manipulation of Bids". guide.iacrc.org. Retrieved 2018-09-11.
  6. Rigged Specifications". guide.iacrc.org. Retrieved 2018-09-11.
  7. Unbalanced Bidding". guide.iacrc.org. Retrieved 2018-09-11.
  8. Unjustified Sole Source Awards". guide.iacrc.org. Retrieved 2018-09-11.
  9. Black, William K. (2004/10). "The Dango Tango: Why Corruption Blocks Real Reform in Japan". Business Ethics Quarterly. 14 (4): 603–623. doi:10.5840/beq200414442. ISSN 1052-150X. Check date values in: |date=(help)
  10. Gupta, Srabana (2001). "The Effect of Bid Rigging on Prices: A Study of the Highway Construction Industry". Review of Industrial Organization. 19 (4): 451–465. doi:10.1023/a:1012568509136. ISSN 0889-938X.
  11. Froeb, Luke M.; Koyak, Robert A.; Werden, Gregory J. (1993-01). "What is the effect of bid-rigging on prices?". Economics Letters. 42 (4): 419–423. doi:10.1016/0165-1765(93)90095-t. ISSN 0165-1765. Check date values in: |date= (help)
  12. Gupta, Srabana (2001). "The Effect of Bid Rigging on Prices: A Study of the Highway Construction Industry". Review of Industrial Organization. 19 (4): 451–465. doi:10.1023/a:1012568509136. ISSN 0889-938X.
  13. Guidelines for Fighting Bid Rigging in Public Procurement - OECD". www.oecd.org. Retrieved 2018-09-11.
  14. Lengwiler, Yvan; Wolfstetter, Elmar G. (2006). "Corruption in Procurement Auctions". SSRN Electronic Journal. doi:10.2139/ssrn.874705. ISSN 1556-5068.